The U.S. Senate has unanimously approved a bill increasing the protections available to companies for their commercial secrets. The Defend Trade Secrets Act of 2016 (DTSA or the Act) provides for the first time a truly uniform, nationwide set of standards protecting trade secrets, plus a private right of action to sue in federal court. The 87-0 passage of the Act reflects strong bipartisan support for the reform, along with vocal support from the Obama Administration and industry organizations. By creating a private right of action in federal court, the Act seeks to harmonize the varied state-by-state implementations of the Uniform Trade Secrets Act (UTSA) and other state law currently governing trade secret disputes.
Employers should take special note of the provisions prohibiting injunctions that limit employee freedom of movement to new employers, and protecting whistleblowing employees who must disclose trade secrets when reporting purported corporate wrongdoing. If the bill becomes law (the House Judiciary Committee has announced it will consider the bill “in the coming weeks”), then any employee contracts or policy documents governing the use of trade secrets entered into or updated after the date of enactment must provide notice of the whistleblower immunity provision. Failure to provide this notice forfeits recovery of exemplary damages or attorneys’ fees under the Act.
Because trade secrets are an increasingly valuable component of many American companies’ intellectual property portfolios, theft becomes even more economically damaging. In a 2013 report, the Commission on Theft of American Intellectual Property estimated that annual losses to the American economy caused by trade secret theft are more than $300 billion and lead to the loss of 2.1 million American jobs each year. Another 2014 study from PricewaterhouseCoopers and the Center for Responsible Enterprise and Trade found the annual cost may be as high as $480 billion. As technology has evolved, the protection of trade secrets, and the detection of their theft, has become increasingly complex.
In contrast to other types of intellectual property, which are primarily protected under federal law, trade secrets have previously been protected under a patchwork of federal and state laws. The UTSA has been adopted in some form by 47 states and the District of Columbia. Although the differences between states are typically minor, they can prove case-dispositive. These differences may affect which party has the burden of establishing that a trade secret is not readily ascertainable, whether the owner has any rights against a party that innocently acquires a trade secret, the scope of information protectable as a trade secret, and what measures are necessary to satisfy the requirement that the owner employ “reasonable measures” to maintain the secrecy of the information.
At the federal level, the Economic Espionage Act of 1996 (EEA) makes trade secret misappropriation a federal criminal offense when a trade secret has an interstate or foreign nexus. See 18 U.S.C. §§ 1831-39. Still, the EEA does not give trade secret owners a private right of action in federal court. While fighting economic espionage and trade secret theft is a priority for federal law enforcement agencies, the resources available for criminal enforcement remain limited.
Introduced on July 29, 2015, by Sens. Orrin Hatch and Christopher Coons, the DTSA was built on previous legislation introduced during the two prior Congresses: the Protecting American Trade Secrets and Innovation Act of 2012 and the Defend Trade Secrets Act of 2014. Consideration of the DTSA by the Senate Judiciary Committee on January 28, 2016, resulted in amendments which are reflected in the as-passed legislation.
The DTSA amends the EEA to create a federal civil remedy for the misappropriation of trade secrets allowing companies to recover damages, enforce injunctions and prevent the further dissemination of stolen trade secrets through federal court action. In extreme circumstances, the DTSA also allows for expedited relief in the form of an ex parte seizure to prevent further dissemination of trade secrets or to preserve evidence. Finally, building on the UTSA, the DTSA creates a uniform standard for what constitutes trade secret misappropriation. Evidencing an intent to harmonize the application of trade secret law, rather than to alter the balance of existing trade secret jurisprudence, “misappropriation” is defined identically under the DTSA as it is under section 1(2) of the UTSA.
CONTENT OF THE DTSA
In general, the DTSA allows for the owner of a misappropriated trade secret to bring a civil action in federal court if the trade secret concerns a product or service used in, or intended for use in, interstate or foreign commerce. The DTSA provides that district courts shall have original jurisdiction of civil actions brought under the Act. In order to bring a claim under the Act, the claim must be brought within the same three-year period of limitations as enacted in the UTSA.
One of the predominant new weapons created for trade secret defense by the Act is the civil seizure provision. The Act authorizes federal courts, in extraordinary circumstances, to provide for seizure of property necessary to preserve evidence or to prevent the propagation or dissemination of a trade secret. Numerous limitations on the civil seizure provision are included in paragraph (A)(ii) of the Act, including requiring a showing of immediate and irreparable injury absent seizure; actual possession of the trade secret and any property to be seized; and the location and a reasonably particular description of the matter to be seized.
Equitable Relief and Employee Mobility
Equitable relief under the DTSA follows directly from section 2 of the UTSA. Of primary importance to the drafters, and evidenced in this section, was that the Act not impinge on employee mobility. Paragraph (3)(A)(i)(1)(I) reinforces the emphasis on employment mobility and contains some additional limitations on injunctive relief that may be ordered. A court may grant an injunction to prevent any actual or threatened misappropriation provided the order does not prevent a person from entering into an employment relationship or otherwise conflict with applicable state laws prohibiting restraints on trade. Importantly, any conditions placed by a court on employment must be based on evidence of threatened misappropriation, and not merely the possession of knowledge.
Relationship to Existing Law
The Act provides that it does not “preempt any other provision of law.” The remedies of the DTSA are intended to coexist with, and not preempt, influence or modify, applicable law governing when an injunction should issue in a trade secret misappropriation matter. If a state’s trade secrets law authorizes additional remedies, those state law remedies will still be available.
Damages and Exemplary Damages
The Act specifies that an award of damages may be issued for the actual loss and any unjust enrichment caused by the misappropriation of a trade secret, or, in lieu of damages measured by any other method, an award of a reasonable royalty. Under the Act, the maximum penalty for a trade secret theft under 18 U.S.C. § 1832 would be amended to be the greater of $5 million or three times the value of the stolen trade secret to the organization, including expenses for research and design and other costs that the receiving organization has thereby avoided.
Although the Act includes damages provisions, the legislative history makes clear the Committee’s preference for remedies that halt the misappropriation, use and dissemination of trade secrets over those that make appropriate damages awards available.
The Act further authorizes an award of exemplary damages, not exceeding twice the compensatory damages awarded, if a trade secret is willfully and maliciously misappropriated.
Of critical importance to several senators was the thoughtful consideration of the interplay between trade secret protection and illegal activity unearthed by employees. As noted by Professor Peter Menell of the UC Berkeley School of Law, “[t]he same routine non-disclosure agreements that are essential to safeguarding trade secrets can be and are used to chill those in the best position to reveal illegal activity.” By the same token though, the difficulty associated with enforcing trade secrets after a leak puts companies at risk if an employee mistakenly discloses trade secrets that do not reveal illegal activity.
Accordingly, the Act includes provisions establishing criminal and civil immunity for anyone who discloses a trade secret under certain circumstances. In the first instance, disclosures made in confidence to a federal, state or local government official, or to an attorney, for the purpose of reporting or investigating a suspected violation of the law are protected. The second instance protects disclosures in a complaint or other document filed under seal in a judicial proceeding brought by an employee against an employer for retaliation against reporting a suspected violation of the law. Both instances are limited to the circumstances covered by the provisions and do not immunize acts that are otherwise prohibited by law.
Finally, the Act requires a notice of the immunity provisions to be set forth in any employment contract that governs the use of trade secrets (or by reference to policy documents) that are entered into or updated after the date of enactment. Failure to provide this notice will prohibit an employer from recovering exemplary damages or attorneys’ fees under the Act. Employers will want to monitor this legislation and be prepared to act if it becomes law.
The next hurdle for the DTSA is a vote by the House of Representatives on a competing bill. Although the House version of the bill has more than 120 sponsors, the House Judiciary Committee has not yet considered it. The Committee Chairman, Rep. Bob Goodlatte, has announced that the Committee will consider the bill “in the coming weeks.”
As evidenced by the unanimous passage in the Senate, co-sponsorship by nearly two-thirds of the Senate, and cross-party co-sponsorship of the House version, the DTSA enjoys tremendous bipartisan support. The Obama Administration has also voiced its continued support of increased efforts to protect trade secrets. In a Statement of Administration Policy relating to the DTSA, the Administration lauded the bipartisan Senate efforts as “[establishing] a federal civil private cause of action for trade secret theft that would provide businesses with a more uniform, reliable, and predictable way to protect their valuable trade secrets anywhere in the country.” Industry support for the DTSA includes advocacy from organizations like the Intellectual Property Owners Association, the U.S. Chamber of Commerce, and U.S. and international Fortune 500 corporations. The strong bipartisan support and support from the President are strong indicators of passage in the near future.